Going into 2021, I (and others) thought there would be a lot of direct listings this year.
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Sure, SPACs were hot. But in late December, the Securities and Exchange Commission approved a proposal by the New York Stock Exchange that made direct listings seem a lot more attractive. They were already a cheaper alternative to an IPO and eliminated lockup periods, but now companies could raise capital through a direct listing as well.
With the NYSE’s rule change, it was expected that more companies would opt for the direct listing route and perhaps raise capital that way. But so far, no venture-backed companies (at least) have raised money through a direct listing, according to Crunchbase data.
“We thought we were going to get a lot more direct listings,” said Joshua McGinn, senior vice president, western region relationship management at the professional services firm AST.
Part of the reason for the fewer-than-expected direct listings is it’s becoming more common for traditional IPOs to include early lockup releases, McGinn said, adding it’s a trend he started to notice in the spring.
Early lockup releases, or ELRs, primarily target employees and allow shareholders to sell their shares sooner than the standard 180 days that come with most IPOs. In that way, they allow companies to give their employees liquidity earlier–a key perk of a direct listing.
Underwriters are also incentivized to negotiate early lockup releases because they collect a not-insignificant fee from an IPO (usually around 7 percent), whereas that’s not the case with a direct listing. McGinn estimates of the 20 or so IPOs he’s working on, about three quarters have early lockup releases.
In general, while there have been fewer direct listings than expected this year, there were still more than there were last year. Last week saw both Amplitude and Warby Parker go public through direct listings. Before that, only four VC-backed companies had gone public through a direct listing this year: gaming company Roblox, website builder Squarespace, hiring website ZipRecruiter, and cryptocurrency platform Coinbase. It should be noted that by our count, only two VC-backed companies, Palantir and Asana, went public through a direct listing in 2020.
According to Patrick Healey, president of Caliber Financial Partners, recent market conditions haven’t been favorable for any kind of public debut, whether that’s a SPAC, direct listing, or IPO. The Federal Reserve signaling that it will likely reduce asset and bond purchases, means there will be slower growth in the economy–which isn’t a good thing, especially for companies in the growth sector and heavily influenced by market sentiment, Healey said.
“The rule is helpful for companies looking to raise capital in that way, but I think if the market environment is unfavorable, you’re not going to see as many companies raise money through direct listings or IPOs,” Healey said.
And many late-stage companies can usually raise money through private financing anyway, Healey added.
“I think a lot of them are being discouraged from tapping into the public markets because they don’t want to have a debut and see the stock sold off right away,” he said.
The market doesn’t like uncertainty, and with the debate in Washington, D.C., over the debt ceiling, the infrastructure spending package, and the budget, it’s unlikely that too many companies will be hitting the public markets until some of those uncertainties are resolved, Healey added.
And as for raising money through a direct listing, no one seems to want to go first.
“Until someone else does that, I don’t think we’re going to see a lot of appetite from counsel, because counsel tends to be conservative when it comes to securities offerings and trying to do things,” McGinn said.
Illustration: Dom Guzman
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